Understanding Money

Before you continue reading, take a moment to ask yourself- what is money? What is your answer? Tell someone beside you. If you don’t have anyone around, you can say your answer to your pet or the wall. Just speak it out. Are you satisfied with your definition of money? Is money just the paper notes you have neatly arranged in your wallet? Though the paper note is money, the definition of money transcends this. It transcends the paper and coins. Therefore, it is important we understand the concept of money for ease and financial prosperity. The knowledge and understanding of money take a part in the principle of prosperity. So if you want to have enough and surplus as touching money then you need to understand it and how it operates.

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. (Wikipedia).

Money is a means of exchange, therefore, it is as old as the exchange of goods and services though it was not in the form of paper notes from the onset.

The History of Money.

The history of money dates back to the advent of the exchange of goods and services. It has since developed and became more sophisticated with time.

Trade by barter was probably the earliest means of exchange. This form of exchange came with quite a number of disadvantages that humans had to seek for a better means to exchange of goods and services among themselves. This led to the use of valuable objects to quantify value and for exchange. These objects range from cowries, gold coins, silver coins and copper coins among others. These served as money at different point in time. These coins were stamped for uniqueness, identification and originality. These are all stages of the development of money. The first stamped coins were minted around 650–600 BC.

Subsequently, paper money or bank notes came to existence with other forms of legal document which can serve as a means of exchange like bank drafts, cheque etc.

Today, money has gone beyond physical to virtual- cryptocurrency, though it is yet to accept worldwide acceptance. Apart from this, wireless transaction is also an area in which money can be said to play a role.

The Functions of Money

1. A medium of exchange- Money serves as a means or medium of exchange. You exchange goods and services with money which can be in the form of paper money, cheques, coins, bank drafts, cryptocurrency etc

2. A measure of value- Money also serves as a measure of value. It is used to quantify the value of goods and services. Product A may cost 10 dollars while product B, 20 dollars. This shows that Product A is of lower value to product B. Though there are other factors to the value of a product. For example, individuals place different value on the same product and therefore the willingness to offer a certain amount for the same product differs.

3.Store of value- Money also serves as a store of value however it is good to understand that money can appreciate or depreciate i.e. it can increase in value or drop in value. So when you use money as a store of value, you need to have this in mind. For example, when you store a farm product, it can spoil i.e. depreciate. Same applies to money, it can ‘spoil’, so don’t just think of saving your money in the bank because the value can drop. Think of investment or multiplication of your money.

4. Standard of deferred payment- it means that money can serve as a means to pay debts.

Why are countries in debt? Why can’t they just print the money they needed?

The United States’ Government is in debt to the tune of 5.87 trillion dollars as of December 31st, 2018. Is that not enormous? The question is why is the US and many other countries in debt? The government prints money; why then are they in debt? Can’t they just print what they needed? Have you ever thought of this?

Money is not printed haphazardly so that it can retain its value. If it is printed with a non-equivalent economic value or product, it drops in value and worth. So the government does not print money anyhow so that the country’s currency can be valuable. They rather borrow money than to print money haphazardly. Just imagine if money is as numerous as sand, what will be the value? Scarcity and value tend to be directly proportional. This is the reason why gold, silver and diamond are of high value because they can’t be found just anywhere and anyhow- they are scarce and therefore commands a higher value.

If a country needs to spend more than its production capacity, she may need to borrow or hold on until she generates the money she needs. The government don’t just print money; they work for it.

The government works to pay her employees their wages and salaries

This needs to be understood especially in countries in which government workers show a nonchalant attitude to work. The government works to acquire the money or resources to pay wages and salaries- they don’t just print money to get this done.

If the workers are not productive then the government runs at a loss in business because they have recurrent expenditure in the form of wages and salaries without returns from these employees. There won’t be a substantial development in a country in which the government runs at a loss as the workers are not productive.

Each worker is supposed to generate more than he/she is paid as a wage or salary for the government. In this sense, both parties benefit from the contract. This also applies to any business owner

Monetary Policy

To maintain the value of money, the government and the central bank play some roles. Some of which are itemized below.

The interest rate at which the central bank loans money to or borrows money from commercial banks can be changed.

Exchange rates can be changed

The government can increase or reduce borrowing

The government can increase or reduce spending

Changes can be made to Currency purchases or sales

The exchanged rate can also be changed.

Taxation

Thanks for reading to the end. My next blog post will be on creating and sustaining wealth as a continuation of the above discussion. You can subscribe to my blog post to get notified.